Chapter 1 – Introduction to Finance
What is Corporate Finance?
What longterm investments should you take on?
Where will you get the longterm financing to pay for your investment?
How will you manage your everyday financial activities?
Financial manager is in charge of answering the above questions.
Financial Management Decisions
Capital Budgeting – the process of planning and managing a firm’s investment in long
Value of the cash flow generated by an assets exceeds the cost of that asset
Concern of when they expect to receive it
Ex: Tim Horton’s deciding whether or not to open stores
Capital Structure – the mix of debt and equity maintained by a firm
Refers to the specific mixture of shortterm debt, longterm debt, and equity the
firm uses to finance its operations
Financial manager has to decide exactly how and where to raise the money
Working Capital Management – planning and managing the firm’s current assets and
How much cash and inventory should we keep on hand?
Should we sell on credit? If so, what terms should we offer, and to whom should
we extend them?
How do we obtain any needed shortterm financing? Will we purchase on credit
or borrow shortterm and pay cash?
1.2 Forms of Business Organization
Keep all profits
Unlimited liability for all business debts
Amount of equity that can be raised is limited to the proprietor’s personal wealth
General partnership; share all gains and loses and unlimited liability for all
Limited partnership; one or more general partners has unlimited liability and runs
the business for one or more limited partners
Corporation – a business created as a distinct legal entity owned by one or more
individuals or entities
o Double taxation – corporations must pay taxes and dividends are as taxed
Income Trust CFIN 300
A noncorporate form of business organization
Holds the debt and equity of an underlying business and distribute the income
generated to unit holders
Not subject to corporate income taxed, until Halloween 2011
An enterprise that is equally owned by its members who share the benefits of co
operation, based on how much they use the services
o Four types
• Provides products or services to its members
• Processes and markets the goods or services produced by
• Provides employment for its members
• Serves the needs of different stakeholder groups
1.3 – The Goal of Financial Management
“The goal of financial management is to maximize the current value per share of existing
To make the market value of the stock a valid measure of financial decisions
requires an “efficient capital market”
o In privately owned and has no traded stock corporations; maximizing the
market value of the owner’s equity
1.4 – The Agency Problem and Control of the Corporation
Relationship between shareholders and management
Agency Problem – the possibility of conflicts of interest between the
shareholders and management of a firm
Agency costs – costs of conflict of interests between shareholders and
o Either Direct or Indirect